Asset management – Compliance & ESG | Oil fund suspension signals broader trend as institutional investors ease defence restrictions

A shift seems to be underway in European investor sentiment towards defence sector investments, driven by geopolitical development and increased defence spending commitments. Industry experts describe it as a fundamental shift in private equity with a reorientation from “avoid” to “engage”. Simultaneously, the Norwegian Government has suspended the oil fund's Council on Ethics work, preventing forced divestments for the $2.1 trillion fund and signalling a broader policy review, including defence-related investment restrictions. This development carries significant weight. Many institutional investors follow the oil fund's exclusion list and its approach to ethical investments. In this newsletter we explore what these changes mean for Norwegian asset managers and how they can position themselves for emerging investment opportunities.

Background and recent developments

European countries are mobilising private capital to support substantially increased defence spending targets. In June 2025, the European Investment Bank raised the amount of loans and guarantees available for the defence industry from €1 billion to €3 billion, whilst the EU allocated a €175 million Defence Equity Facility to support innovative dual-use products, including Norwegian companies.

Nordic institutional investors have been early movers in easing restrictions on defence investment.[1] Several major pension funds relaxed their policies in May and June 2025, typically lifting bans on investing in aerospace and defence companies whilst retaining restrictions on munitions and controversial arms such as chemical weapons. One pension fund removed several European defence companies from its exclusion list, whilst a Helsinki-based pension insurer updated its principles for responsible investment to include the defence sector within its enhanced due diligence process.

The shift in sentiment towards defence investment has generated debate. Critics argue that normalising weapons investment, even with exclusions for controversial weapons, represents a departure from established ethical investment principles. Some investors and stakeholders remain opposed to defence sector involvement despite these changing trends.

Through BAHR’s ongoing assistance to Norwegian asset managers, spanning fundraising processes, investor negotiations, and direct LP engagement on excuse rights and mandate amendments, we are witnessing a shift towards eased defence-related investment restrictions.

What this means for Norwegian asset managers

The new trends indicate that previous investor concerns presented in mandates and side letters may be outdated. The biggest practical challenge for asset managers is probably related to broad restrictions that unintentionally exclude portfolio companies involved in different technologies and multi-purpose equipment. Far-reaching restrictions on dual-use products can hinder investments in GPS equipment, satellites, thermal imaging, drones and other technologies, potentially limiting the investment universe more than intended.

Common investor requirements for existing funds prohibit investment in the production of or trade in military goods and services of any kind, in companies earning more than a fixed percentage of income from such activities, or in companies involved directly or indirectly in the production of weapons components. Given recent developments and trends, such restrictions may increasingly be amended or relaxed going forward, enabling asset managers to participate in emerging investment opportunities without being constrained by outdated policy frameworks.

BAHR comments

The shift in sentiment and the Norwegian oil fund’s review create a window for asset managers to reassess their policies before new market standards crystallise. Any competitive advantage from early adaptation may prove temporary as frameworks evolve industry-wide.

Asset managers establishing new funds may wish to focus on formulating exclusions that preserve maximum flexibility. Exclusion language should be drafted with precision, distinguishing between weapons banned under international humanitarian law and broader defence-related activities. Side letters with excuse rights and/or transfer rights may be preferable to absolute investment restrictions that constrain the fund’s investment universe. Specific carve-outs for dual-use technologies could help prevent unintentionally excluding new technologies.

For existing funds, managers may be facing stress-testing of mandates – particularly regarding technology investments with potential dual-use applications. It may be advisable to examine whether existing restrictions could inadvertently exclude opportunities beyond their intended scope. Asset managers should consider initiating proactive LP dialogue before specific opportunities arise, framing discussions around evolving market standards and peer approaches. Thorough engagement with LPs is recommended if there is uncertainty about whether restrictions extend further than intended. The oil fund’s review may provide a useful opportunity to synchronise policy discussions with LPs.

Defence-related investments are likely to require extended due diligence given heightened regulatory and security risks. Critical areas include compliance with sanctions and export control laws, which are inherently complex and subject to rapid change, as well as human rights concerns not typically present in standard private equity or venture investments.

[1] Private Equity International, issue 239, October 2025.